DP5083 | Immigration and Prices

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Abstract

This paper examines the behaviour of prices following the unexpected arrival of a large number of Former Soviet Union (FSU) immigrants to Israel during 1990. The paper uses store-level price data on 915 CPI products to show that the increase in aggregate demand prompted by the arrival of the FSU immigration significantly reduced prices during 1990. Controlling for native population size, city and month effects, a one percentage point increase in the ratio of immigrants to natives in a city decreases prices by 0.5 percentage point on average. It is argued that this negative immigration effect is consistent with the arrival of new consumers - the FSU immigrants - having higher price elasticities and lower search costs than the native population. Thus, immigration can have a moderating effect on inflation through its direct effect on product markets, and not only by increasing the supply of labour.